The Non Farm Payroll report came out this morning, and the results were disappointing. In May, the US economy created only 38,000 jobs, and the figure was adversely affected owing to a strike by Verizon workers, which affected 34,000 employees. Even without the Verizon strike, payrolls would have increased by a mere 72,000. The unemployment rate dropped by 0.3% to 4.7% thanks to a decline in the participation rate. Additionally the report also revised March and April’s combined figure downward by 59,000. This is the worst performance since September 2010. It proves that the Fed’s rate hike in December was plain wrong.
Not everyone believes that monetary policy is the culprit here. Reuters noted, “Some economists say the sharp slowdown in employment last month was payback after unseasonably warm weather boosted hiring in February and March.”That may well have had an effect. February’s initial figure was 242,000 against estimates of 190,000. In March, the 215,000 jobs created topped expectations by 10,000. If the excess were moved to May’s figure, the result would be about 100,000 jobs, still a significant slowing of job growth.
The wire service also stated, “They [the economists] also viewed the weak payroll growth as a delayed response to tepid first-quarter economic growth. “Employment sometimes lags economic activity, which means the weakening trend in the first five months of this year may simply reflect the sharp slowdown in the economy in the first quarter, exacerbated in April and May by a shift of some seasonal hiring,” said Chris Low, chief economist at FTN Financial in New York.”
Why would the economy slow in the first quarter? One must acknowledge a causal link to December’s Fed rate increase. Higher rates are designed to slow the economy. That’s the definition of monetary policy. So, the anemic jobs report stems from a slow first quarter, which was at least partially caused by the rate rise.
There is more evidence in the report that the Fed’s tightening is premature at best. “Average hourly earnings rose five cents, or 0.2 percent. That kept the year-on-year rise at 2.5 percent. Economists say wage growth of between 3.0 percent and 3.5 percent is needed to lift inflation to the Fed’s 2 percent target.” In other words, the Fed wants wages to rise by over 3% per year, and they aren’t there yet. The Fed raised rates before inflation reached the target, and wages suggest it isn’t going to get there any time soon.
With any luck, the Fed will stop fighting the battles of the 1970s and focus on the problems of 2016 (aging population and sluggish growth mean a risk of deflation). Joey Lake, US analyst at the Economist Intelligence Unit, told the BBC the jobs report was “bad, bad, bad: there is no positive spin to it. The labour market slowdown will make the Federal Reserve reconsider its next move,” M.r Lake said. “It reduces the chance of a June rate increase and makes it more likely the Fed will wait until July, after the Brexit vote, which will also reduce the political risk from abroad.”
The trouble with predicting Fed policy at this point is that the symptoms of a slow economy are there, and the Fed seems much more interested in attacking a potential bout of mild inflation. Since the Fed is looking at things all wrong, one should not be surprised that its policy prescription is wrong. One can only hope that the lousy jobs report and the weak economic growth convince the FOMC to leave rates where they are.
Meanwhile, some fiscal stimulus would be welcome, but with the election coming up, the Republicans are not about to do anything useful.